The invoice factoring company cut my advance rate, they won’t give me any more money, charged me for re-directing payments and they annoy my customers!

I had a conversation with a borrower recently that was looking for an unsecured business loan. He said he didn’t want to use his property; he was slightly behind in taxes and had a paid default from last year. I discovered that he was already using invoice factoring and the financier was causing him all sorts of grief. He went on a fifteen-minute rage about how bad invoice factoring companies are and it’s the worst thing that ever happened to him.

I was immediately suspicious, after hearing all his issues I quickly delved deeper into the workings of why he was having so many troubles with a well known factoring company.

Before I go into the why?

It’s important to understand that invoice factoring relies almost solely on the strength of your invoicing, in almost all cases this is the only security the lender has and in the traditional sense it is considered to be unsecured, not tied to any tangible assets like property, cash or equipment.

When you factor your invoices, the financier uses each individual invoice/s as security and provides you cash up front against the future payment from your customer/s. The payments are directed back into the financiers account to repay what they originally gave you.

Invoice factoring is a simple financing tool, however there a few things that you need to get right. If you get these things right you will have a very smooth and easy relationship with your factor and pretty much have cash on tap when you need it, remember your invoices are the only security you are accessing funding against.

6 Tips To Keep You Out of Trouble:

Only ever present invoices for funding for completed work or delivered products.

Provide a clear professional invoice with proof that work has been done or goods delivered.

DO NOT ask your customer to pay you directly; payments for invoices you have financed are owed to the factor. Don’t do it. This is a serious breach of the relationship and contractual terms in most factoring arrangements.

DO NOT present invoices that you know will be potentially offset or disputed.

DO NOT receive money by mistake and “forget” to tell the factoring company. This is their money they advanced you originally. Factor’s consider this stealing.

Always follow up on overdue invoices, just because your invoices are being financed now, doesn’t mean you can slack off and stop collections.

Let’s go back to the Why?

As you can see there are some simple rules however, they must be adhered to. Keeping your invoicing clean and not disrupting payments owing to the factor will rocket you into harmony with your financier.

So, I soon learned from the borrower that he had collected some cheques from customers directly and banked them into his account. This was money owed to the finance company; he double dipped the chip and sent alarm bells ringing for the finance company. He had broken the trust between them. He advised me that he didn’t realize the money was for the factoring company; even though he told me earlier that he financed all his invoices and the cheques normally were posted to the factors address. Go figure right?

How did this lead to his hatred?

Banking the cheques and keeping the money had a flow of effect. Firstly the factor would have noticed that no money had come in for the invoices that they financed, spoken to the customer and discovered the borrower collected the cheques directly. The factor then would have cut the funding on the spot, hassled the customer as to why they handed the cheques over when they had been paying to the factor for over a year and then had to deal with the borrowers excuses as to why he collected them and can’t pay the money back. It’s like selling your car, taking the cash and then stealing it back and driving it around again.

From this short-term act of gaining some extra cash, the borrower had put his business in a worse off position. He now had to deal with his breach of trust, cash flow crunch and possible legal action.

Factoring companies are a pretty understanding bunch when it comes to mistakes or mishaps, however they don’t tolerate anything that is deliberately done to deceive them, as would anyone else.

Why have I told you this tale?

It goes back to basic human decency; treat others how you expect to be treated. This borrower had admitted to me what he had done only after an intense conversation and still wanted me to source funding for him with another lender. His hatred for invoice factoring only stemmed from his own doing and as a result the team at Loandesk could not morally ask one of our lenders to finance a borrower with this type of character.

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I am a small business finance & lending columnist at Loandesk, teaching entrepreneurs what loan options are available to them in Australia, explaining the differences between each loan type & how to position themselves for the best chance of getting approved for their perfect loan. My thoughts have been published on Startupsmart, CEO Magazine, Smartcompany & more...